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The Situation Room

Rupert Murdoch Under Fire; Debt Talks Continue

Aired July 14, 2011 - 18:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

WOLF BLITZER, CNN ANCHOR: And you're in THE SITUATION ROOM.

Happening now: crisis on a new front for Rupert Murdoch and his media empire, the FBI now said to be investigating alleged hacking of 9/11 victims. Stand by for new information.

Also, a new round of debt talks over at the White House this hour. We're learning new details of what's happening behind closed doors, plus a glimmer of hope in the U.S. Senate.

And a plan to split California into two states -- we will meet the man behind the controversial secession drive.

We want to welcome our viewers in the United States and around the world. Breaking news, political headlines and Jeanne Moos all straight ahead. I'm Wolf Blitzer. You're in THE SITUATION ROOM.

The hacking scandal plaguing Rupert Murdoch's British businesses has now spread to his U.S. media empire. A federal law enforcement source telling CNN the FBI has now launched an investigation into Murdoch's News Corporation. The probe focusing in on allegations of hacking into phone conversations and voice-mail of September 11 survivors, victims and their families.

CNN's Brian Todd is working on the story for us.

Brian, a major new development today. What's going on here?

BRIAN TODD, CNN CORRESPONDENT: Wolf, the pressure on Rupert Murdoch and his News Corporation is growing more intense in the U.S. overall right now. We have spoken to several people on Capitol Hill today, and more members of Congress are agitating for Murdoch to answer to them as well. From Capitol Hill to the FBI, Murdoch and his News Corporation are facing the prospect of much more scrutiny ahead.

(BEGIN VIDEOTAPE)

TODD (voice-over): A law enforcement source in the U.S. tells CNN, looking into Rupert Murdoch's News Corporation is now a high priority, so high, the source says, that the FBI has already launched an investigation. The source says the probe is focusing on allegations that Murdoch's employees or associates may have hacked into phone conversations and voice-mail of September 11 victims and their families. Anyone acting on behalf of News Corporation is being looked at, the source says, from the top down to janitors. Democratic Senator Frank Lautenberg also believes News Corporation violated federal law against bribing officials in foreign countries for information.

(on camera): Would you want to hold hearings and maybe call Mr. Murdoch or his executives?

SEN. FRANK LAUTENBERG (D), NEW JERSEY: Certainly that would be a serious consideration. I'm waiting now for a return from the Justice Department.

TODD (voice-over): In canvassing Capitol Hill, we have learned of growing sentiment for Congress to delve into the activities of Rupert Murdoch and his journalists. Most of those calls are from Democrats. Murdoch is a big backer of Republicans.

(on camera): If more momentum builds for probes into possible hacking in the United States or even congressional hearings, there are cautionary tales for lawmakers, reports that the tabloids sometimes turn the tables on those who investigate them.

(voice-over): Most of those accounts date back to well this scandal blew up in the media in recent weeks.

Martin Moore of the British watchdog group Media Standards Trust tells us when British parliamentarians look into the tabloid press a couple of years ago, he heard of allegations that they were discouraged from repeatedly inviting Rebekah Brooks, one of Murdoch's top execs, to testify.

MARTIN MOORE, MEDIA STANDARDS TRUST: The allegation was they were told, members of that select committee were told, do not invite her again. Do not press this one, do not push it, because if you do, you will regret it. And that was made very clear to them.

TODD: Contacted by CNN, a News Corporation spokesman would not comment on that allegation.

(on camera): Are you concerned that they might hit back at you and dig into your personal life or whatever?

LAUTENBERG: I'm not worried about my personal life nor am I worried about my next term. I have been here 27 years. And when you grow up in a poverty-stricken area and poverty-stricken household, you develop a thin skin. I don't scare that easily.

(END VIDEOTAPE)

TODD: A News Corporation spokesman would not comment when we asked him about the possibility of congressional hearings and would not comment on the FBI investigation, but in one of his first interviews on the scandal, Rupert Murdoch chose to speak to "The Wall Street Journal" which he owns. He defended his company's handling of the crisis and vowed to establish an independent committee that will -- quote -- "investigate every charge of improper conduct" -- Wolf. BLITZER: Brian, if Murdoch's company, which is headquartered in New York City, is found to have violated criminal law, like the anti- bribery law, the Foreign Corrupt Practices Act, could it be fined? Could it be shut down? What's going on here?

TODD: Well, on whether it could be shut down, legal experts are at odds over that. Some say if the Justice Department carries this through completely and a court eventually finds News Corporation broke that anti-bribery law, then the FCC could revoke its license, but others say they have really not heard of a case of that happening, that it sometimes results in fines and jail time, but not of a company shutting down. That's maybe a long way down the road.

BLITZER: Yes, it certainly is at this point, the investigation only just beginning.

But let's dig deeper -- thanks, Brian -- with CNN contributor, the former assistant FBI Director Tom Fuentes.

Tom, explain what's involved when we get the word the FBI has now begun some sort of investigation or probe into the Murdoch empire.

TOM FUENTES, CNN CONTRIBUTOR: OK.

Right now, Wolf, based on the fact that so many public allegations have been made about that company and the fact that the company operates in the U.S. as well, the FBI has begun what it's calling a preliminary assessment. So it's kind of nuanced to say it's not a full-blown investigation.

But the reason is that there's been an abundance of accusations. And there's been an abundance of smoke, if you will. Now they're going to look and see if there's an actual fire. So far there's not been a substantiated allegation to show that there has been criminal activity in the U.S., but that's what they will be looking into.

BLITZER: So the allegation is that someone working for Murdoch's empire may have illegally broken into the voice-mail, hacked into the phones of victims, survivors, family members from 9/11. I guess that would be a crime, right?

FUENTES: Right. But basically, if News Corp.'s subsidiary companies in London did these activities, then the assumption is, well, maybe they were doing it in the United States as well.

Now a private investigator has come forward and said that he was approached after 9/11 to hack into victims' voice-mail accounts, but he didn't report it to the authorities then. And there's really I don't think any way at the moment to substantiate that.

Now, the other way that it would be that could be substantiated would be if a reporter from one of these companies actually says, yes, I was involved in it or my colleagues were involved in it and provided additional information.

BLITZER: What's the jurisdiction of the FBI? News Corporation is an American-based company, but most of the allegations, almost all of the allegations are some subsidiaries that it has in London, in England. So what's the FBI's involvement?

FUENTES: Well, right now the London office of the FBI, working with its counterparts from Scotland Yard and the other authorities, is basically monitoring their investigation to see whether or not News Corp. itself was involved in the allegations of the bribery.

The fact that you have subsidiary companies of News Corp. doesn't necessarily mean that the executives themselves in News Corp. knew that this hacking was going on in London, if it's proven.

BLITZER: And if there were bribes of foreign police officials in London or other officials by a subsidiary of News Corporation, that would be a crime in the United States, too, right?

FUENTES: Not necessarily. That would be difficult to prove, because if those companies are based in the U.K...

BLITZER: Subsidiaries.

FUENTES: Subsidiary companies -- then they're not going to be necessarily subject to Foreign Corrupt Practices Act jurisdiction on the part of the United States.

Now, News Corp. is traded on Nasdaq, so it's considered a U.S. corporation. If executives in News Corp. were involved and were knowledgeable of bribery of public officials in the U.K., then that would be in violation of the Foreign Corrupt Practices Act. That's a felony. They could be prosecuted here in the United States for that.

BLITZER: Very quickly because we have got to go, but you sort of wish you were still in the FBI to be investigating this kind of case? Or would you just as soon let someone else do it?

FUENTES: Wolf, I always wish I was still in the FBI.

BLITZER: Tom, thanks for coming in.

FUENTES: Thank you.

BLITZER: The Murdoch hacking scandal underscores security concerns about cyberspace, and the Pentagon taking the threat very, very seriously right now, unveiling today some new plans for a potential cyber-war, as well as a massive recent cyber-breach.

Let's to go to our Pentagon correspondent Barbara Starr. She's got details.

Barbara, what's going on?

BARBARA STARR, CNN PENTAGON CORRESPONDENT: Wolf, indeed today, the first news of a massive breach of military cyber-security, even as troops are getting ready to possibly use their smartphones and iPads from the middle of the next firefight.

(BEGIN VIDEOTAPE)

STARR (voice-over): In the field, touch-screen phones and tablet devices are being tested by soldiers. Soon, troops may be texting battlefield messages, photos and reports right from the front line.

But modern communications are risky. The phone hacking scandal in Britain just the latest example of today's vulnerabilities. And just as the Pentagon unveiled its plans for operations in cyberspace, top officials revealed one of the worst breaches ever.

WILLIAM LYNN, UNITED STATES DEPUTY SECRETARY OF DEFENSE: Indeed, in a single intrusion this past March, 24,000 files were taken. It was done we think by a foreign intelligence service; in other words, a nation state was behind it.

STARR: Pentagon officials confirmed it was sensitive U.S. military data taken from a contractor's computer system. Cyberspace is now a potential war zone.

LYNN: Cyber-attacks will be a significant component of any future conflict, whether it involves major nations, rogue states, or terrorist groups.

STARR: In 2008, an infected flash drive was inserted into a laptop on a U.S. military base. A foreign spy agency had placed a malicious code on the drive, transferring secret data to foreign control.

For the first time, a foreign government had a cyber-beachhead. The new Pentagon strategy focuses on defending military systems from theft and denial or disruption of service. But it's tough.

MICHAEL CHERTOFF, FORMER U.S. HOMELAND SECURITY SECRETARY: You're going to wind up using component elements that are built around the world. And so the issue of securing the supply chain becomes very much a security matter.

STARR: In the event of a devastating attack in military cyber- space, the president could order a conventional counterattack using missiles or bombs. But at least one senior officer says even the more mundane phone hacking scandal is still concerning.

LYNN: It does worry me, more from the standpoint that to date industry in the chip sets that we use in our displays, the chip sets that we use in our phones or other end point devices don't -- are not currently configured to encrypt. And we're going to have to start to think our way through as a nation.

(END VIDEOTAPE)

STARR: And if you're wondering, Wolf, the Pentagon would not say which country it thought was responsible for this latest massive cyber-security breach -- Wolf.

BLITZER: A lot of people will guess.

All right, thanks very much for that, Barbara. Appreciate it.

As the U.S. inches towards possible, possible default, one economist is warning that tough choices will lead to public outcry. Is the United States heading down the same path, though, as Greece?

Plus, who's really leading Republicans in the debt talks? We have new details of tension and intrigue behind closed doors. Stay with us. You're in THE SITUATION ROOM.

(COMMERCIAL BREAK)

BLITZER: Jack Cafferty is here with "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN ANCHOR: Wolf, we've got an overworked labor force operating in an underperforming economy, and it could be affecting our health.

A new study released by researchers in Spain found that working for more than 40 hours a week leaves employees six times more likely to suffer long-term exhaustion, or irritability or a lack of interest in their work and non-work lives, something called burnout syndrome. Some of us have been suffering from it for years.

Workers who feel under-challenged on the job, left to do what they feel are brainless, monotonous tasks also at risk of developing this burnout syndrome. So are people who have stayed in the same job too long, those with more than 16 years service in the same position five times more at risk of developing burnout syndrome than colleagues who have been at the job for four years or less.

With the economy in its current state, it's no surprise this is a growing problem. It has the potential to become an epidemic.

The Spanish researchers found that having a family, a partner or a spouse to go home to at night helps people deal with burnout. I guess there is some benefit to being able to go home and complain to someone.

But where does it end? Careers are getting longer, retiring at 65 not even an option for many of us anymore. With 9.2 percent unemployment in this country, those of us who have a job are lucky to have one. And some of us need to work more than one job just to pay the bills every month.

So, here's the question. Do you feel like you're a member of the burnt-out generation?

Go to CNN.com/caffertyfile and post a comment on my blog -- Wolf.

BLITZER: All right, Jack, thank you.

The looming deadline to raise the U.S. debt ceiling is no answer to the fiscal crisis the U.S. is facing, that according to our next guest.

Peter Morici is a professor of business at the University of Maryland, well known to many of our viewers.

What do you mean by that, that even if there's a resolution right now, it's not going to really solve the problem?

PETER MORICI, FORMER DIRECTOR OF ECONOMICS, U.S. INTERNATIONAL TRADE COMMISSION: Well, government spending is up $1.1 trillion over the last four years. They're talking about cutting, tops, maybe $200 billion, $250 billion a year.

There's a lot more work to done and Moody's and Standard & Poor's have made it clear that even beyond this deadline, they expect to see a deficit reduction program in place or we're getting downgraded come next year.

BLITZER: So you think that's going to happen?

MORICI: I think there's a -- I would bet that we are going to be downgraded because by next year, I think there will be a significant risk that at some point, the United States will have to take measures that will make their bonds worth less.

BLITZER: Do you believe there will be a deal between now and August 2?

MORICI: Yes, I do. The stakes are just too high. And if there's not a deal, there's some levers to pull that the president has at his disposal.

Remember, he said no deal by Saturday, then we will have to start looking about ensuring that we don't default.

BLITZER: So our viewers who are on Social Security right now, they can expect, you believe, after August 2, they will get their checks on time, military veterans will get their benefits on time, everything will be business as usual, at least in the short term; is that what you're saying?

MORICI: I don't know that it will be on time. There may be some lags. You might get a check two days late. It's kind of hard to delay things with all the electronic payments that we have, and the money might not come in as quickly as we need, but I do believe the U.S. government will not shut down.

BLITZER: How important from your perspective, and you're a professor of business, is it to reform the tax code so some of these loopholes, these exemptions, these subsidies for big business and others simply go away and there's more of a level playing field?

MORICI: It's absolutely essentially that we do two things, we have a more rational tax code. And, frankly, I'm a fiscal conservative. You know that, Wolf. But we need to not only cut spending. We all need to pay a bit more taxes to get out of this mess.

BLITZER: So when you say have a tax code, for example, General Electric, which didn't pay any federal income tax last year, even though they made $14 billion, you would have them at least pay something?

MORICI: I think they should pay a third of that in taxes.

BLITZER: Thirty-three percent, as opposed to 35 percent, which is the highest rate.

(CROSSTALK)

MORICI: Well, maybe that's a bit high, but given what everybody else is paying, they should certainly be paying $10 billion, $15 billion.

BLITZER: And some hedge fund managers who are making $4 billion or $5 billion paying at 15 percent as opposed to 35 percent, that's a mistake, too?

MORICI: That carried interest provision is ridiculous. That must be fixed.

BLITZER: People are going to have to work on a lot.

Medicare and Medicaid and Secret Service, from your perspective, all have to be on the table?

MORICI: Absolutely. Social Security, we need to raise the age to retirement. We have got in our heads that work...

BLITZER: It's 67 now.

MORICI: It's 67. It really should be 70.

BLITZER: Seventy?

MORICI: Absolutely.

(CROSSTALK)

BLITZER: People work hard. They want to retire at 67.

MORICI: You work hard. I work hard. But we can do our jobs as effectively at 70 as people 50 years ago did at 65, perhaps more so.

BLITZER: Peter Morici, thank for coming in.

MORICI: Nice to be with you.

A plunge in the number of foreclosures sounds like good news. But wait until you hear the fine print. The numbers don't lie. We will tell you the whole story.

And Southern California sometimes seems like a different planet. So it's no surprise that people there, some of them at least, are talking about making it a new state, and not including Los Angeles. We will tell you what's going on right here in THE SITUATION ROOM.

(COMMERCIAL BREAK) (NEWS BREAK)

BLITZER: Warnings of a possible U.S. debt default are growing more dire. Listen to this.

(BEGIN VIDEO CLIP)

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN: I think it would be calamitous outcome. It would create a very severe financial shock that would have effects not only on the U.S. economy, but on the global economy.

(END VIDEO CLIP)

BLITZER: But instead of a deal, White House talks are filled with tension and intrigue. We're getting new details of what is happening behind closed doors. They just wrapped up today's meeting.

And the latest casualty of Minnesota's government shutdown, we're talking about beer.

(COMMERCIAL BREAK)

BLITZER: Here's a revealing moment, House Republicans talking to reporters about debt ceiling negotiations, but when it came time for questions, who did the first question go to? No, it wasn't the speaker of the House, John Boehner, instead the majority leader, Eric Cantor, perhaps a telling sign of what's going on.

But let's talk. Let's get a little bit more on the talks, maybe a glimmer of hope from the Senate.

Our congressional correspondent Kate Bolduan is standing by with the latest.

What are you hearing, Kate?

KATE BOLDUAN, CNN CORRESPONDENT: Hey there, Wolf.

Well, White House Press Secretary Jay Carney, he cautioned today not to expect a hallelujah moment from today's meeting. We did just hear that there's not a meeting planned for tomorrow at the White House. Maybe that's because the way out, the final way out may be coming from up here.

(BEGIN VIDEOTAPE)

BOLDUAN (voice-over): The Federal Reserve chairman on Capitol Hill repeated his stern warning that default could cause chaos.

BERNANKE: I think it would be calamitous outcome. It would create a very severe financial shock that would have effects not only on the U.S. economy, but on the global economy.

BOLDUAN: And the Obama administration's top moneyman, flanked by Senate Democrats, reminded lawmakers of what's at stake. TIMOTHY GEITHNER, U.S. TREASURY SECRETARY: And we have looked at all available options, and we have no way to give Congress more time to solve this problem, and we're running out of time. And the eyes of the country are on us.

BOLDUAN: Despite the ominous words, talks to resolve the debt crisis are stuck, and the finger-pointing continues.

SEN. MITCH MCCONNELL (R-KY), MINORITY LEADER: If the president wants to threaten seniors or veterans or rattle the world economy by pretending he can't pay our bills, he, of course, can do that. But he's not going to implicate Republicans in these efforts.

BOLDUAN: Democrats singled out the No. 2 House Republican Eric Cantor, even calling him, quote, "childish."

SEN. CHUCK SCHUMER (D), NEW YORK: Leader Cantor has yet to make a constructive contribution to these discussions. More than anything else, he is holding up an agreement at this point.

BOLDUAN: Meantime, top Republican leaders sought to present a unified front Thursday amid talk of a rift between Cantor and House Speaker John Boehner, leading to one of the lighter moments of these negotiations.

REP. JOHN BOEHNER (R-OH), HOUSE SPEAKER: Let me just say we have been in this fight together, and any suggestion that the role that Eric has played in those meetings has been anything less than helpful is just wrong.

BOLDUAN: And as the meetings continue at the White House, it could be, if there's a light at the end of the tunnel, it's on Capitol Hill. Senators Mitch McConnell and Harry Reid, working on a possible way out of the debt stalemate.

SEN. HARRY REID (D-NV), MAJORITY LEADER: We don't have it worked out yet. But it's something we will look into. We're hoping we can come up with this big, robust deal we've been trying to get. But until we do that, we're going to have to look at other alternatives, and this is one of them.

(END VIDEOTAPE)

BOLDUAN: Now, it is a complex plan that would allow the president to raise the debt ceiling, but also allow Congress to disapprove of him doing so, to vote against it. It may also include a commission that would recommend spending cuts and could include some of the spending cuts that are already agreed to in these debt talks. Either way, the idea got a big boost today, Wolf. House Speaker John Boehner saying in a press conference that, in the absence of anything else, it's a worthy option.

BLITZER: Who was the Democrat who called Eric Cantor, Kate, childish?

BOLDUAN: It's probably someone that you've heard of before. That would be the House majority -- the Senate majority leader, Harry Reid. Gloves are off, Wolf, in terms of the rhetoric around this.

BLITZER: Yes. Paul Begala said the last hour that Eric Cantor was a lightweight, so obviously, he's -- he's getting on their nerves a little bit in these negotiations.

BOLDUAN: Yes.

BLITZER: Kate Bolduan up on the Hill. Thanks very much.

Let's get some more now with our senior political analyst, David Gergen. He's joining us, as well as our chief political analyst, Gloria Borger. Gloria, who's really leading the Republicans in these negotiations?

GLORIA BORGER, CNN CHIEF POLITICAL ANALYST: You're talking about Eric Cantor. It started out, Wolf, that John Boehner, the House speaker, and the president were -- were meeting together alone to try to and come up with some grand bargain. That's gone.

I was speaking with a senior administration official who said to me today that it is Eric Cantor who is, quote, "doing all the talking," all the talking in the meetings. He said, "I think Mitch McConnell says hello and goodbye," and then he said, "John Boehner says nothing."

So inside those meetings, Eric Cantor is talking, and it's very clear from what occurred yesterday and what we're hearing today that the White House is a little bit frustrated by Mr. Cantor.

BLITZER: If there's no deal, David, who gets the blame?

DAVID GERGEN, CNN POLITICAL ANALYST: Well, everybody is going to get the blame. It's going to be a pox on all your houses coming from the country, especially if with go into default. There's going to be huge anger at the incumbents in both parties. The Republicans will pay a heavy price, because the president has, you know, in effect staked out a high ground in terms of the argument.

But Wolf, at the end of the day, it's the president who also suffers and usually suffers the worst if the economy sputters. If we go into an early recession, God forbid, the president's going to pay a huge, huge price.

BORGER: And Wolf, you know, the president does not want to continue talking about the debt ceiling. He's got other messages he needs to talk about. He needs to talk about jobs.

And there were a couple polls today where 67 percent of Americans said that they want a deal to raise the debt ceiling. That includes taxes on the wealthy as well as spending cuts. So it seems that, politically at least, the White House argument may be taking hold right now.

GERGEN: Well, let's wait and see here. The president still is the one who bears the ultimate...

BORGER: Exactly.

GERGEN: ... burden if things break down. I do think it's time for a truce. I do think that they could get a ceasefire in place. There are the element of a deal here, partly drawn on McConnell's plans, partly drawn on what Boehner has done.

I think it's possible they will get a deal. It is beyond -- what we know from the past is that what they call these white-knuckle moments is that the politicians look so dysfunctional, but at the end of the day, when the country is really at stake, they come up with something. It's going to be far less than what we need as a country, but I do believe we will not default.

BLITZER: And you know, Gloria, I spoke in the last hour with Paul Ryan, who's the chairman of the House Budget Committee. Unlike some of the real Tea Party activists at the House who say they will not vote in favor of any legislation that increases the debt ceiling, he says he would vote yay. He would vote in favor if it were a good deal.

BORGER: Right. I mean, I think there's this question about whether you consider these loophole closers new revenues. That's sort of the key here. And I think there are a lot of those freshmen Republicans, 87 House Republicans who took a -- all of them that took the pledge not to raise taxes.

When I spoke to the senior administration official about it today, from observing these talks, he said to me it looks to him like the tail is wagging the dog. That you have Republican leaders who are essentially auditioning to run their own troops. He said, quote, "This is what happens when you're sitting on top of a tidal wave that you didn't create."

BLITZER: And David, you'll appreciate this. I write about it in my blog today at CNN.com/SituationRoom. Back in 2006, when the Republicans were in the majority, President Bush was in the White House, they had a 52 to 48 vote to raise the debt ceiling in the United States Senate. All the Democrats voted against raising the debt ceiling, including then senators Barack Obama, Joe Biden, Hillary Clinton, Harry Reid. They all voted against it. All of the Republicans except three voted in favor of it.

You see that kind of vote then, what's going on now, the rhetoric, very similar then, except the Republicans were saying what the Democrats are saying now. Read that blog. You can't help but becoming a little cynical when you see what's going on in Washington.

GERGEN: Well, I think that's actually right, Wolf. But we haven't come this close before. You know, we've often voted on raising the debt ceiling under Democrats and Republicans. But we haven't come this close before to default. And the warnings that are going up around the world, not only from Moody's and not only from Bernanke but now from China today. China holds $1 trillion in U.S. debt, as you know. Shaking their finger at us and saying, "You guys dare not go into default."

I somehow think that we're going to -- we're going to stop just short of that. But this is a terrible way to run a country.

BLITZER: Check out the blog, because I've got some lines in there from "The New York Times" report on that vote. And some of the rhetoric is amazingly similar about the default and everything else, the U.S. credit rating. Check it out.

GERGEN: Look forward to reading it. Look forward to reading it.

BLITZER: CNN.com/Situation room.

Gloria, thank you very much.

Sarah Palin has some advice for Republicans negotiating the debt ceiling with the White House. Hear what it is. That's coming up.

And supremely ridiculous is what the governor's office calls it. But could part of California actually become a 51st state?

(COMMERCIAL BREAK)

BLITZER: Questions about the debt ceiling are relentless for the Republican presidential candidates. Some are cagey, dodging the question whenever they can. Others are insistent that they would never vote -- they would never do anything to raise the debt ceiling on their watch.

Our political correspondent, Jim Acosta's, here with more on this story.

It's interesting how they're dealing with it.

JIM ACOSTA, CNN CORRESPONDENT: That's right. It's easy to make those kinds of statements when you're not in the -- in the seat of government, having to make those decisions.

But from drawing lines in the sand, Wolf, to campaign video slamming any talk of compromise, the Republican field for 2012 is jockeying at this point to see who can take the toughest line on the debt ceiling.

(BEGIN VIDEOTAPE)

ACOSTA (voice-over): Accused by Democrats and a few of his Republican rivals of taking a low profile on debt talks in Washington, GOP frontrunner Mitt Romney has now hit the ceiling.

MITT ROMNEY (R), PRESIDENTIAL CANDIDATE: The president to agree to cut federal spending, to cap federal spending, and to put in place a balanced budget amendment. And that is the answer for the debt limit. It's the answer for the nation. That's the line in the sand.

ACOSTA: Nearly all of the declared and potential Republican candidates are ratcheting up the rhetoric on the issue, with Sarah Palin returning to one of her controversial catch phrases. SARAH PALIN, FORMER GOVERNOR OF ALASKA: We cannot default, but we have to -- we cannot afford to retreat right now. Now is not the time to retreat. It's time to reload, and we reload with reality.

ACOSTA: Michele Bachmann accused the president and even the treasury secretary of passing on what she called a misnomer.

REP. MICHELE BACHMANN (R-MN), PRESIDENTIAL CANDIDATE: That if Congress fails to raise the debt ceiling by $2.5 trillion, that somehow the United States will go into default and we will use the full faith and credit of the United States. That is simply not true.

ACOSTA: A few hours after Bachmann's comments, the powerful Moody's investors' service announced it was reviewing the AAA bond rating for the U.S. For voters, it's a question of who do you trust, Bachmann or Ben Bernanke, the chairman of the Federal Reserve?

BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: I think it would be calamitous outcome.

UNIDENTIFIED MALE: In the '80s, we did it to Reagan.

ACOSTA: Ron Paul released a new movie trailer-like TV ad warning past budget compromises with Democrats have only led to higher taxes.

UNIDENTIFIED MALE: The '90s brought more compromises, more broken promises, and more new taxes.

ACOSTA: The ad doesn't mention that during the '90s, President Bill Clinton balanced the budget after raising taxes. A new Quinnipiac poll finds just 25 percent of Americans want only spending cuts as part of a debt deal. Sixty-seven percent would increase taxes on the wealthy and corporations.

That won't fly with the current GOP candidates, who have all signed pledges not to raise taxes, except for Jon Huntsman. Still, any Republican accused of playing politics can just point to the president, who voted against hiking the debt ceiling in 2006.

BARACK OBAMA, PRESIDENT OF THE UNTIED STATES: Well, that was just an example of a new senator making what is a political vote, as opposed to doing what was important for the country.

(END VIDEOTAPE)

ACOSTA: Besides Bachmann, Paul, and long-shot Thad McCotter, the rest of the GOP field does not have to cast a vote on the debt ceiling. And Wolf, that is a luxury a lot of politicians in Washington would like to have right now.

BLITZER: It certainly is. All right. Thanks very much. Jim Acosta is our new political correspondent. You're going to be a busy guy in the next several months.

ACOSTA: I know.

BLITZER: And years.

ACOSTA: Sounds good.

BLITZER: Thanks very much. Congratulations.

ACOSTA: Thank you.

BLITZER: The United States has two Dakotas, two Carolinas, two Virginias. Now there's a growing push to add two Californias. CNN's Thelma Gutierrez is in Los Angeles with details of a secession drive that would split the Golden State into two.

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: You really have to try hard. You really have to be an idiot to screw up the state of California.

UNIDENTIFIED MALE: We have hit a nerve with citizens that are just fed up with businesses as usual in the state.

UNIDENTIFIED FEMALE: You want to secede the state of California? I sure hope you don't want to be governor.

THELMA GUTIERREZ, CNN CORRESPONDENT (voice-over): It's this kind of citizen outrage in Riverside, California, that's fueled one of the most radical political ideas to recently surface in the Golden State.

JEFF STONE, RIVERSIDE COUNTY SUPERVISOR: I'm talking about a secession plan from the state of California.

GUTIERREZ: That's right, a 51st state called the state of Southern California. County Supervisor Jeff Stone says secession may be the only way to get Riverside County and 12 other largely politically conservative counties back on track.

STONE: What the state has done is that they' been balancing their budgets on the backs of our local coffers. They've been stealing our sales tax, our property tax.

GUTIERREZ: Stone says the state has turned its back on his constituents, who have been hit hard by a tough economy.

STONE: The bottom line for me and my constituents is jobs. We are sending jobs out of the state of California by the trainload. We have some areas of this county that have 25 percent unemployment. The average in Riverside County is about 15 percent.

UNIDENTIFIED MALE: Foreclosures, we are the foreclosure capital of the world.

GUTIERREZ: If the state won't work with local government, Stone says he'll rally the troops to part ways.

PROF. ROBERT MELSH, POLITICAL SCIENCE: Insanity. I mean, this is -- this is major surgery where maybe we need a Band-Aid. GUTIERREZ: Political Science Professor Robert Melsh says secession won't fix the state and will cost a fortune to take to the voters.

MELSH: It takes millions of dollars to get the signatures necessary to put up an initiative. And more millions to sell it. Where is that money coming from? He hasn't addressed the cost and the -- the establishment of a new government. Where are we going to put the capital? Disneyland?

GUTIERREZ (on camera): Even when you came up with this idea of secession, you had to have known that it was a radical one...

STONE: Yes.

GUTIERREZ: ... for which you would be criticized.

STONE: Listen, I knew I'd be criticized. I've learned in my tenure of being a public official for 19 years that sometimes you have to do some pretty outrageous things to get people's attention. Now listen, I'm not discounting the fact that secession is a possibility.

GUTIERREZ (voice-over): Judging by this pile of e-mails Jeff Stone showed me, overwhelmingly in support of his idea, he may have hit a nerve with disenchanted Californians.

(END VIDEOTAPE)

GUTIERREZ: So what's next for the proposed state of Southern California? Well, Riverside County will hold a summit and invite locally elected leaders throughout the state to try to come up with some kind of solution.

Now Supervisor Stone says if that doesn't work, he's going to take the issue to the voters, who have heard it all before. At one time, the states of Western California and Coastal California were proposed. Different regions have tried to secede from the state at least 27 times since the 1800s to no avail, Wolf.

BLITZER: Thelma Gutierrez. Intriguing idea. We'll see what happens. Thank you.

All right. This just coming in. Minnesota's two-week government shutdown will soon end, according to the governor's office. The governor and the Republican state leaders just emerged after a three- hour meeting to say the basic framework of a deal had been reached and that the shutdown will end within days.

Minnesota's government shut down July -- Minnesota's government shut down back on July 1, essentially -- essentially furloughing 22,000 state workers.

The ticking debt clock has tempers flaring. CNN's Jeanne Moos looks at some of the outrageous things lawmakers are saying. That's coming up.

(COMMERCIAL BREAK)

BLITZER: Get right back to Jack for "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN ANCHOR: The question this hour, Wolf, is: "Do you feel like you're a member of the burnt-out generation?"

Cheryl in South Carolina: "Definitely. I'm lucky enough to have a recession-proof job, but I'm working much longer hours for less money than I made ten years ago. We're almost $50,000 upside down on our mortgage, and there is no relief in sight. Burned out is one way to describe it."

C.W., Kansas City, Missouri: "Stomped on, run over, short changed, media manipulated, marginalized, confused, lied to, marketing targeted sensory overloaded trivialized, devalued, exhausted, and yes, burned out."

Peggy writes, "Age 64 and, yes, did everything right. Worked hard, raised a family, paid the mortgage, paid the taxes. For that effort, I now feel like a hostage to the nonsense going on in Washington, D.C. And I'm feeling like I have to spend my time worrying about the collapse of my government. I'm tired of seeing the powerful run roughshod over the rest of us. I'm so sad for this country right now and so worried about my children and grandchildren's future."

Mark in Oklahoma City writes, "I'm a teacher. I love working with kids. I love to teach, but I'm tired. I'm very tired, and I guess that -- I am not that old and won't be able to retire for ten more years at least. It's sad for me, for my students, even my dog that I come home to every evening, who notices I'm just not the same lovable happy person that I once was. That was a great question to ask. And I hope you don't get burned out any time soon. Your segments often give me something to smile about."

Jim in Colorado: "Burned out with work, trying to stay a step ahead of the bill collectors, you bet you. I'm working hard, but wage stagnation and increased costs for other benefits and household items are eating my lunch financially. I wish the politicians would realize the middle class needs a little help out here and that the 2 percent need to share in the pain that we're all feeling."

Curtis in Philadelphia writes, "Wow, deja vu, Jack. It's like you're my guidance counselor, and it's 1981 all over again. Total flashback."

You want to read more, go to the blog: CNN.com/CaffertyFile -- Wolf.

BLITZER: Thanks very much, Jack. Good question. Jack Cafferty with "The Cafferty File."

When the full faith and credit of the United States is on the line, politicians get nasty. The mockery, the teasing and the taunts. That's next.

(COMMERCIAL BREAK)

BLITZER: Here's a look at this hour's "Hot Shots."

In Spain, a bull is chased into the sea as part of a festival tradition. The bulls are then brought back to land by boat.

In the Philippines, a horse-zebra hybrid grazes on grass at the Manoa Zoo.

In England, a man jumps off the top of a harbor wall into the sea.

And in France, fighter jets fly over the Louvre in celebration of Bastille Day, an important day in the history of the French Revolution.

"Hot Shots," pictures coming in from around the world.

Things can get nasty when you're talking about trillions of dollars in debt. CNN's Jeanne Moos looks at the low lights of the debt talk ceiling that's going on.

(BEGIN VIDEOTAPE)

JEANNE MOOS, CNN CORRESPONDENT (voice-over): We are indebted to the debt ceiling for making our politicians testy-testy.

UNIDENTIFIED MALE: President Obama, quit lying.

UNIDENTIFIED FEMALE: I think Mitch McConnell, frankly, has lost his mind.

REP. CORRINE BROWN (D), FLORIDA: And you think this mess started 18 months ago? No, it did not!

MOOS: A Democrat gets fiery. A Republican mocks her back.

REP. STEVE WOMACK (R), ARKANSAS: I think we're going to have to extend the space shuttle for an extra day to retrieve that thought process. It got so far out there in orbit.

MOOS: These politicians aren't even the ones stuck in the room where the debt talks are taking place.

(on camera) Now, since cameras aren't allowed in the negotiating room, we can only imagine the annoyance, the exasperation, the tension.

UNIDENTIFIED MALE: Temperatures began rising.

UNIDENTIFIED FEMALE: Debt negotiations turning nasty.

UNIDENTIFIED MALE: An angry president shoves his chair back and walks out.

MICHELLE MALKIN, CONSERVATIVE COMMENTATOR: It seems like the president had a, well, hissy fit.

UNIDENTIFIED MALE: When it almost came to blows between Eric Cantor and the president.

MOOS: Almost came to blows? That's almost as overblown as comparing the debt talks to "The Real Housewives of New Jersey."

TERESA GIUDICE, REALITY TV STAR: (UNINTELLIGIBLE) (EXPLETIVE DELETED).

UNIDENTIFIED FEMALE: Teresa, completely, certifiably crazy out of her mind.

MOOS (on camera): Remind you of anything?

UNIDENTIFIED FEMALE: I think Mitch McConnell, frankly, has lost his mind.

MOOS (voice-over): Mitch McConnell's raise the debt ceiling plan got bashed by both sides.

DONALD TRUMP, REAL ESTATE MOGUL: It's called "el foldo."

MOOS: And the president got compared to a Popeye character.

UNIDENTIFIED MALE: He reminds me of the cartoon character Wimpy, where Wimpy said...

UNIDENTIFIED MALE: I'll gladly pay you Tuesday for a hamburger today.

MOOS: This has literally become a food fight.

OBAMA: We might as well do it now. Eat our peas.

ELISABETH HASSELBECK, CO-HOST, ABC'S "THE VIEW": Tell us to eat our peas like bratty little kids.

ROMNEY: By the way, did you see I got a big plate of peas, and I ate all my peas. And so now it's the president's turn to cut federal spending.

UNIDENTIFIED FEMALE: Speaker Boehner reportedly said that dealing with the Democrats is a lot like dealing with JELL-O.

UNIDENTIFIED FEMALE: JELL-O is slippery, slidy.

JAY CARNEY, WHITE HOUSE SPOKESMAN: I love JELL-O personally. If you mix peas in it, you can...

MOOS (on camera): Never mind the debt ceiling. Just be glad there's no blood on the ceiling, unlike Al Capone in "The Untouchables."

ROBERT DE NIRO, ACTOR: I get nowhere unless the team wins.

MOOS: may the politicians at the debt talks take a bat to the budget.

Jeanne Moos, CNN, New York.

(END VIDEOTAPE)

BLITZER: That's it for me. Thanks very much for watching. I'm Wolf Blitzer in THE SITUATION ROOM. For our international viewers, "WORLD REPORT" is next. In North America "JOHN KING USA" starts right now.